Honig to Fight Accusations by Federal Audit : Inquiry: Schools chief denies using his influence to enrich an education foundation run by his wife. He also opposes preliminary U.S. demands for refund of $222,590.

SACRAMENTO — State schools Supt. Bill Honig vowed Tuesday to fight a draft audit report that accuses him of using his influence to help a foundation run by his wife and that demands a $222,590 refund in federal money.

The U.S. Department of Education charged in a preliminary audit that Honig had a conflict of interest from 1987 to 1989, when the state Department of Education dealt with Quality Education Project. Nancy Honig, his wife, is the president and founder of the organization, earning $100,000 a year.

"What they're saying is preposterous," Honig said, hoping to douse what he called the inflammatory conclusions in the report. Calling the audit "fundamentally flawed," Honig said it "distorts crucial facts."

"I am confident that the assistant secretary of education will find that no violation occurred and that California's expenditure of the federal funds in question is completely legitimate," Honig said.

The Dec. 19 audit has not been released, but details about its conclusions were reported in the Sacramento Union and San Francisco Examiner, and confirmed by officials.

"The Superintendent of Public Instruction for the state of California engaged in a pattern of activity that materially benefited the financial condition of Quality Education Project (QEP)," the draft audit says.

The $222,590 in dispute flowed from the federal government to the state Department of Education and was earmarked to benefit underprivileged children.

The state in turn gave the money to local districts that had contracted with Mrs. Honig's organization, and the money paid the salaries of four school employees in Fremont, Pasadena and San Diego County who worked closely with the project.

The preliminary audit alleges that Honig's actions violated the California Political Reform Act of 1974, though Honig says the Fair Political Practices Commission, which is supposed to enforce the act, found no violation of the law.

If the federal demand for a refund is kept in the final audit report, the state Board of Education could block repayments from state funds and leave the Honigs to repay the money. Honig and the state Board of Education have been locked recently in a power struggle.

Honig says his department has severed most of its ties with Quality Education Project, which was founded in 1982, the same year he took office. The project, which the Honigs describe as a charity, has run programs in 54 school districts, mostly in California.

Honig has 30 days to formally respond to the report. He also is fighting a related battle with state Atty. Gen. Dan Lungren, whose investigators seized documents while searching his San Francisco home in October. Lungren's office is investigating potential criminal wrongdoing. Honig said he will meet with the state investigators in January.

Honig insisted that no money was misused. "It didn't seem wrong then. It doesn't seem wrong now," Honig said. But he also acknowledged the potential political damage from reports of the investigations.

"If people look at this very quickly they may think something is wrong," Honig said.